Liquidity Scramble Begins In MF Commingling Aftermath

When sharing our perspective last night on why the alleged MF Global crime of commingling client capital with the firm's deficiency capital we asked, "What happens next? Why customers at all other brokerages, all other exchanges, afraid that their money will suffer the same fate as MF, even if they transact with perfect solvent clearers and agents, will proceed to pull their money, as they know they have nobody to trust but their own prudent and forward looking actions. Which in turn will start the kind of liquidity drain that killed not only Lehman, but froze money markets, and with that brought the complete capital markets to a standstill, only to be thawed after the Fed pledged multiples of the US GDP to rescue Wall Street in October of 2008." Sure enough, here it comes. "Reports of short falls of client money ... if true would be a disaster for all the smaller brokers and banks as nobody will trust them anymore," one London trader said. Reuters continues "MF Global filed for bankruptcy protection on Monday, putting a sudden end to Corzine's drive to transform the more than 200-year old MF Global into a mini Goldman by taking on more risky bets on euro zone sovereign debt. In Australia, trading in grain futures and options was suspended by bourse operator ASX Ltd , prompting concerns about the integrity of the country's agricultural futures market. "We're sitting out here with risk that we can't cover," said Jonathan Barratt, head of Sydney-based Commodity Broking Services. MF Global was one of the largest participants in the country's agricultural futures market. And it is all only going to get worse as the liquidity outflow avalanche is realized, following the market's most recent distraction with Europe.

The London Metal Exchange said in a statement it had suspended MF Global from trading with immediate effect, following a similar move by the CME Group, which operates the Chicago Mercantile Exchange.

The news also hurt other commodity markets.

"Grains were definitely affected. Grain options volumes were miniscule yesterday compared to normal, which suggests MF Global were pretty large options players in the U.S. grains," a European commodity fund analyst said.

CME Group data showed volumes on December corn options <0#CZ1+> almost halved on Monday to 33,872 contracts, from Friday's volume of 61,714 contracts.

Fears the collapse might hurt other market players spread on what was already a dark day for stock markets in Europe, after Greece said in a shock announcement it would subject its bail-out to a referendum, deepening the sense of crisis in Europe.

"A number of Chinese arbitrage players were caught out with cash and margin at MF Global which will likely lead to lighter trading volumes (and more volatility) until the situation is resolved," RBC Capital Markets said in a note.

But don't worry: while a 30 year old UBS trader is going to jail for being a complicit scapegoat in UBS wiping out a few billion of its own money, Jon Corzine, who has successfully undermined confidence in capital markets to a level not seen since Lehman, will not only walk away scott free, but may well get a $12.2 million gold parachute.